You are here

The Impact of Fiscal Policy on Poverty in Ethiopia: A Computable General Equilibrium Micro Simulation Analysis

Abstract:

In recent periods, Ethiopia has implemented various fiscal policy reforms. Most of these reforms center around indirect taxes and pro-poor expenditure patterns. This study investigates the short-run economy-wide impacts of these fiscal policy changes on poverty. To this effect, the study used a static computable general equilibrium (CGE) model linked to a micro simulation (MS) model. The CGE model used the 2005/06 social accounting matrix (SAM) and the MS model used the 2004/05 Household Income, Consumption and Expenditure (HICE) survey to investigate household poverty via the consumption expenditure changes from the CGE model. The fiscal policies simulated are domestic indirect taxes, government consumption expenditures, and government transfers to households. The findings of the study suggest that the increase in revenue from indirect taxes has worsened the poverty situation of households. The results from the CGE model have all shown decline in real GDP, sectoral output, employment and welfare. In contrast, the study found improvements in the poverty state of households as a result of the introduction of various short-run expenditure measures. However, examination of the net effect revealed worsening poverty at the national level in general and rural households in particular. On the other hand, poverty tended to decline among urban households though negligibly. The major conclusion is that the tax policy has dominant adverse effects on poverty in the short-run. Thus, policy makers need to take into account these adverse effects and come up with short-run pro-poor spending policies that would protect households from the negative strains while the financing policies should continue being implemented.